国际财务管理课后习题答案chapter 10.docx
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国际财务管理课后习题答案chapter10
CHAPTER10MANAGEMENTOFTRANSLATIONEXPOSURE
SUGGESTEDANSWERSANDSOLUTIONSTOEND—OF-CHAPTER
QUESTIONSANDPROBLEMS
QUESTIONS
1.Explainthedifferenceinthetranslationprocessbetweenthemonetary/nonmonetarymethodandthetemporalmethod.
Answer：
Underthemonetary/nonmonetarymethod，allmonetarybalancesheetaccountsofaforeignsubsidiaryaretranslatedatthecurrentexchangerate.Otherbalancesheetaccountsaretranslatedatthehistoricalrateexchangerateineffectwhentheaccountwasfirstrecorded。
Underthetemporalmethod，monetaryaccountsaretranslatedatthecurrentexchangerate。
Otherbalancesheetaccountsarealsotranslatedatthecurrentrate，iftheyarecarriedonthebooksatcurrentvalue.Iftheyarecarriedathistoricalvalue，theyaretranslatedattherateineffectonthedatetheitemwasputonthebooks.Sincefixedassetsandinventoryareusuallycarriedathistoricalcosts,thetemporalmethodandthemonetary/nonmonetarymethodwilltypicallyprovidethesametranslation。
2。
Howaretranslationgainsandlosseshandleddifferentlyaccordingtothecurrentratemethodincomparisontotheotherthreemethods，thatis，thecurrent/noncurrentmethod，themonetary/nonmonetarymethod，andthetemporalmethod？
Answer:
Underthecurrentratemethod，translationgainsandlossesarehandledonlyasanadjustmenttonetworththroughanequityaccountnamedthe“cumulativetranslationadjustment"account。
Nothingpassesthroughtheincomestatement。
Theotherthreetranslationmethodspassforeignexchangegainsorlossesthroughtheincomestatementbeforetheyenterontothebalancesheetthroughtheaccumulatedretainedearningsaccount。
3.IdentifysomeinstancesunderFASB52whenaforeignentity’sfunctionalcurrencywouldbethesameastheparentfirm’scurrency。
Answer：
ThreeexamplesunderFASB52,wheretheforeignentity’sfunctionalcurrencywillbethesameastheparentfirm’scurrency，are：
i）theforeignentity’scashflowsdirectlyaffecttheparent’scashflowsandarereadilyavailableforremittancetotheparentfirm；ii）thesalespricesfortheforeignentity’sproductsareresponsiveonashort—termbasistoexchangeratechanges,wheresalespricesaredeterminedthroughworldwidecompetition;and,iii）thesalesmarketisprimarilylocatedintheparent’scountryorsalescontractsaredenominatedintheparent'scurrency。
4。
DescribetheremeasurementandtranslationprocessunderFASB52ofawhollyownedaffiliatethatkeepsitsbooksinthelocalcurrencyofthecountryinwhichitoperates,whichisdifferentthanitsfunctionalcurrency.
Answer:
Foraforeignentitythatkeepsitsbooksinitslocalcurrency,whichisdifferentfromitsfunctionalcurrency，thetranslationprocessaccordingtoFASB52isto:
first,remeasurethefinancialreportsfromthelocalcurrencyintothefunctionalcurrencyusingthetemporalmethodoftranslation，andsecond，translatefromthefunctionalcurrencyintothereportingcurrencyusingthecurrentratemethodoftranslation.
5。
Itis,generally，notpossibletocompletelyeliminatebothtranslationexposureandtransactionexposure。
Insomecases，theeliminationofoneexposurewillalsoeliminatetheother。
Butinothercases，theeliminationofoneexposureactuallycreatestheother。
Discusswhichexposuremightbeviewedasthemostimportanttoeffectivelymanage，ifaconflictbetweencontrollingbotharises.Also，discussandcritiquethecommonmethodsforcontrollingtranslationexposure。
Answer:
Sinceitis，generally,notpossibletocompletelyeliminatebothtransactionandtranslationexposure,werecommendthattransactionexposurebegivenfirstprioritysinceitinvolvesrealcashflows.Thetranslationprocess，on—the-otherhand，hasnodirecteffectonreportingcurrencycashflows,andwillonlyhavearealizableeffectonnetinvestmentuponthesaleorliquidationoftheassets。
Therearetwocommonmethodsforcontrollingtranslationexposure：
abalancesheethedgeandaderivativeshedge。
Thebalancesheethedgeinvolvesequatingtheamountofexposedassetsinanexposurecurrencywiththeexposedliabilitiesinthatcurrency,sothenetexposureiszero。
Thuswhenanexposurecurrencyexchangeratechangesversusthereportingcurrency，thechangeinassetswilloffsetthechangeinliabilities。
Tocreateabalancesheethedge，oncetransactionexposurehasbeencontrolled，oftenmeanscreatingnewtransactionexposure。
Thisisnotwisesincerealcashflowlossescanresult.Aderivativeshedgeisnotreallyahedge,butratheraspeculativeposition,sincethesizeofthe“hedge”isbasedonthefutureexpectedspotrateofexchangefortheexposurecurrencywiththereportingcurrency.Iftheactualspotratediffersfromtheexpectedrate,the“hedge”mayresultinthelossofrealcashflows。
PROBLEMS
1。
AssumethatFASB8isstillineffectinsteadofFASB52.ConstructatranslationexposurereportforCentraliaCorporationanditsaffiliatesthatisthecounterparttoExhibit10.7inthetext。
Centraliaanditsaffiliatescarryinventoryandfixedassetsonthebooksathistoricalvalues。
Solution:
ThefollowingtableprovidesatranslationexposurereportforCentraliaCorporationanditsaffiliatesunderFASB8,whichisessentiallythetemporalmethodoftranslation。
ThedifferencebetweenthenewreportandExhibit10。
7isthatnonmonetaryaccountssuchasinventoryandfixedassetsaretranslatedatthehistoricalexchangerateiftheyarecarriedathistoricalcosts。
Thus，theseaccountswillnotchangevalueswhenexchangerateschangeandtheydonotcreatetranslationexposure。
ExaminationofthetableindicatesthatunderFASB8thereisnegativenetexposurefortheMexicanpesoandtheeuro，whereasunderFASB52thenetexposureforthesecurrenciesispositive。
ThereisnochangeinnetexposurefortheCanadiandollarandtheSwissfranc。
Consequently，iftheeurodepreciatesagainstthedollarfrom€1。
1000/＄1。
00to€1。
1786/$1。
00，asthetextexampleassumed,exposedassetswillnowfallinvaluebyasmalleramountthanexposedliabilities,insteadofviceversa。
Theassociatedreportingcurrencyimbalancewillbe$239，415，calculatedasfollows:
ReportingCurrencyImbalance=
-
€3,949,000
0
€1.1786
/
$1.00
-
-
€3,949,000
0
€1.1000
/
$1.00
=
$239,415.
TranslationExposureReportunderFASB8forCentraliaCorporationanditsMexicanandSpanishAffiliates,December31,2005（in000CurrencyUnits）
Canadian
Dollar
Mexican
Peso
Euro
Swiss
Franc
Assets
Cash
CD200
Ps6，000
€825
SF0
Accountsreceivable
0
9，000
1，045
0
Inventory
0
0
0
0
Netfixedassets
0
0
0
0
Exposedassets
CD200
Ps15,000
€1,870
SF0
Liabilities
Accountspayable
CD0
Ps7，000
€1，364
SF0
Notespayable
0
17，000
935
1，400
Long-termdebt
0
27，000
3,520
0
Exposedliabilities
CD0
Ps51，000
€5，819
SF1，400
Netexposure
CD200
（Ps36，000）
（€3，949）
（SF1，400）
2。
AssumethatFASB8isstillineffectinsteadofFASB52。
ConstructaconsolidatedbalancesheetforCentraliaCorporationanditsaffiliatesafteradepreciationoftheeurofrom€1.1000/$1。
00to€1。
1786/＄1.00thatisthecounterparttoExhibit10。
8inthetext.Centraliaanditsaffiliatescarryinventoryandfixedassetsonthebooksathistoricalvalues。
Solution：
ThisproblemisthesequeltoProblem1.ThesolutiontoProblem1showedthatiftheeurodepreciatedtherewouldbeareportingcurrencyimbalanceof$239，415。
UnderFASB8thisiscarriedthroughtheincomestatementasaforeignexchangegaintotheretainedearningsonthebalancesheet。
Thefollowingtableshowsthatconsolidatedretainedearningsincreasedto＄4,190，000from＄3,950,000inExhibit10.8。
Thisisanincreaseof＄240，000，whichisthesameasthereportingcurrencyimbalanceafteraccountingforroundingerror。
ConsolidatedBalanceSheetunderFASB8forCentraliaCorporationanditsMexicanandSpanishAffiliates，December31,2005:
Post-ExchangeRateChange（in000Dollars）
CentraliaCorp。
（parent）
Mexican
Affiliate
Spanish
Affiliate
ConsolidatedBalanceSheet
Assets
Cash
$950a
＄600
＄700
$2,250
Accountsreceivable
1，450b
900
887
3，237
Inventory
3，000
1，500
1，500
6，000
InvestmentinMexicanaffiliate
-c
-
-
—
InvestmentinSpanishaffiliate
—d
—
-
—
Netfixedassets
9,000
4，600
4，000
17，600
Totalassets
＄29,087
LiabilitiesandNetWorth
Accountspayable
＄1，800
＄700b
＄1,157
$3,657
Notespayable
2，200
1，700
1,043e
4，943
Long—termdebt
7，110
2,700
2，987
12，797
Commonstock
3，500
—c
—d
3,500
Retainedearnings
4，190
-c
—d
4，190
Totalliabilitiesandnetworth
$29，087
aThisincludesCD200，000theparentfirmhasinaCanadianbank，carriedas＄150,000。
CD200，000/（CD1。
3333/＄1.00）=$150，000。
b$1，750,000-＄300，000（=Ps3，000，000/（Ps10。
00/＄1。
00））intracompanyloan=＄1，450，000。
c，dInvestmentinaffiliatescancelswiththenetworthoftheaffiliatesintheconsolidation。
eTheSpanishaffiliateowesaSwissbankSF375,000（÷SF1.2727/€1.00=€294，649）.Thisiscarriedonthebooks，
aftertheexchangeratechange,aspartof€1，229，649=€294,649+€935，000。
€1，229，649/（€1。
1786/＄1。
00）=＄1,043，313。
3。
InExample10.2,aforwardcontractwasusedtoestablishaderivatives“hedge"toprotectCentraliafromatranslationlossiftheeurodepreciatedfrom€1.1000/$1。
00to€1。
1786/＄1.00.Assumethatanover—the—counterputoptionontheeurowithastrikepriceof€1.1393/$1。
00（or＄0。
8777/€1.00）canbepurchasedfor$0.0088pereuro。
Showhowthepotentialtranslationlosscanbe“hedged"withanoptioncontrac
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